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Journal of Finance and Investment Analysis, Vol. 2, No.4, 2013
DETERMINING IMPACTS ON NON-PERFORMING LOAN RATIO IN TURKEY
Metin Vatansever1 and Ali Hepen2
Abstract
[1] study finding a regression equation to explain the trends of NPL ratio in
Hang Kong by using nominal interest rates, the CPI, property prices, equity
prices, number of bankruptcies, the unemployment rate, and real GDP as
explanatory variables They find that the NPL ratio rises with increasing
nominal interest rates and an increasing number of bankruptcies, but
decreases with higher CPI inflation, economic growth, and property price
inflation. Additionally, [2] shows that Czech NPL of the corporate sector
rate can be positively affected by increasing real effective exchange rate,
the loan to GDP ratio, unemployment and interest-rate increases.
Beside on classic linear regression model, [3] and [4] use VAR
methodology to investigate which factors is most effect on NPLs. [5]
indicates yields can be used to make accurate predictions of the future
effects of the business cycle on asset quality. [6] show the impact of GDP
growth and the business cycle on credit risk and also on the quality of
bank loans.
On the other hand, [7] and [8] study panel date set to understand of NPLs
behaviors on their own researches. They use both macroeconomic and
bank-specific factors. According to their studies, the quality of loans can
be explained mainly by macroeconomic variables.
3 Data and the Theoretical Framework
3.1 Overview of Data
There is a growing literature which suggests that NPL ratio maybe be
explained by both macroeconomic and bank specific factors. In this study,
we take into consideration, 6 bank specific factors, 10 macroeconomic
factors and 2 global factors. Table 1, table 2 and table 3 gives those
variables.
Table 1: Bank Specific Factors
Bank Level Factors
INEF
Dept
ROE
Definitions
LOAS
CAR
Definitions
RSCI
CPI
EUR
USD
IPI
ISE
M3Y
UR
Unemployment Rate
IR
Interest Rate
GNP
Definitions
EGNP
VIX
NPL
Sample
2007:01 2013:03
Observations:
75
Mean
0.034576
Median
0.033225
Maximum
0.050747
Minimum
0.025157
Std. Dev.
0.007677
Skewness
0.693126
Kurtosis
2.279410
Jarque-Bera
7.627949
Probability
0.022060
(4)
This last model is obviously the best one. p-values of , , , , , , , , and are
all within acceptable range and they are significance at 5% significance
level. As for goodness-of measures and values are about 0.97 and
0.96 respectively, which indicate the regression fits quite well. Finally, pvalues of the F-statistics are zero. The Akaike, Schwarzs Bayesian
information criteria are -0.901 and -0.597 respectively which are minimum
values in experimenting with various functional forms. It obviously shows
that the first, second and fourth lag of error term have significant and
important effect on our model.
There is, however, a possibility that the ordinary least square results may
be misleading due to inappropriate standard errors because of the
presence of heteroskedasticity. In order to test whether error terms are
heteroskedastic or not the heteroskedasticity test (with cross term) is
carried out [16]. The probability value of 0.209 in this test show that error
term is jointly insignificant even at 5% significance level, meaning that
they are no heterosketastic in our models.
We need also to test for serial correlation. Breusch Godfrey Serial
Correlation LM test is applied for the three different models. The
(effectively) zero probability values in this test strongly indicate the
presence of serial correlation in the residuals. In the presence of serial
correlation, the ordinary least square estimators are still unbiased as well
as consistent and asymptotically normally distributed, but they are no
longer efficient, meaning that standard errors are estimated in the wrong
way and, therefore, usual confidence intervals and hypotheses tests are
unreliable. Moreover, usually, the finding of autocorrelation is also an
indication that the model is misspecified. [17] proposed a general
covariance estimator. The covariance estimator is used to try overcome
standard errors for autocorrelation in the error terms in the model. In
order to correct the standard errors for autocorrelation, the model is reestimated by ordinary least square with Newey-West2 procedure and then
all indicators become significant at 5% significance level. Based on these
results, the model is correct specified.
4.2 Cointegration Analysis
As indicated before, since it is critical to find out whether the results
obtained from our model are meaningful (i.e., not spurious) or not, let we
apply formal unit root tests in each series to test the reliability of our
estimates.
4.2.1 Unit Root Tests
The established standard procedure for cointegration analysis is to start
with unit root tests on the time series data being analyzed. The
Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root test are
used to test for the presence of unit roots and establish the order of
integration of the variables in the model.
Table 5: Summary of ADF and PP Tests for Unit Roots in the Variables
Variable
ADF Test
Probability
PP Test
Probability
Results
NPL
-0.535
0.481
-0.638
0.437
IPI
1.068
0.924
0.741
0.872
ISE
1.075
0.925
1.091
0.927
UR
-0.195
0.612
-0.474
0.507
ROE
-1.570
0.109
-1.659
0.092
INEF
-0.963
0.297
-0.906
0.321
CAR
-1.279
0.184
-1.330
0.169
Table 5 shows the results of the ADF and PP unit root tests3. The null
hypothesis of the test is that there is a unit root against the alternative
one that there is no unit root in the variables.
The ADF and PP statistics for NPL, IPI, ISE, UR, ROE, INEF and CAR are all
insignificant at 5% level of significance, which leads to non-rejection of the
null hypothesis that there is a unit root problem in the variables.
According to ADF and PP test, it is obvious that the variables are nonstationary.
As mentioned previously, differencing has the effect of making the
variable stationary. Table 6 summarizes the results of unit root tests for
first difference variables.
Table 6: Summary of ADF and PP Tests for Unit Roots in the Variables (In
1st Difference)
Variable
ADF Test
Probability
PP Test
Probability
Results
NPL
-2.176
0.029
-4.047
0.000
IPI
-2.232
0.026
-15.303
0.000
ISE
-3.480
0.000
-7.439
0.000
UR
-.5.825
0.000
-3.178
0.002
ROE
-5.742
0.000
-9.484
0.000
INEF
-4.610
0.000
-4.610
0.000
CAR
-6.157
0.000
-6.185
0.000
The ADF and PP test statistics for the first difference variables are all
significant at 5% level of significance, which leads to rejection of the null
hypothesis that there is a unit root problem in the variables. Based on ADF
and PP test, it is apparent that the first difference variables are stationary,
which implies that the variables are integrated of order one, I(1).
4.2.2 The Augmented Engle-Granger (AEG) Test
The residuals from the estimation of equation 3 used to test for the
existence of cointegrating relationship between the NPLs ratio and several
macroeconomic and bank specific factors. The null hypothesis is that the
residuals have a unit root problem against the alternative that the
variables cointegrate. The AEG test is presented in the below table (Table
7).
Table 7: Summary of ADF and PP test output for 3 equation
ADF Test
Probability
PP Test
Probability
Results
-2.770
0.006
-8.138
0.000
The probability values in those tests indicate that residuals are significant
at 5% significance level, meaning that that the null hypothesis is rejected.
To reject the null hypothesis implies that the residuals have not a unit root
problem, i.e., they are stationary. It can therefore be concluded that,
based on the AEG method, the variables are cointegrated.
4.2.3 Cointegrating Regression DurbinWatson Test
Since cointegration is very crucial to the reliability of estimated
parameters, a second test, namely CRDW test, was carried out to make
sure that the variables in this study are definitely cointegrated. The
DurbinWatson statistic for the regression represented by equation (3) is
1.61, which is above the 1% critical value of 0.511. Therefore, we fail to
reject the null hypothesis of cointegration at the 1% level.
To sum up, our conclusion is based on both the AEG and CRDW tests
giving the variables that NPL, IPI, ISE, UR, ROE, INEF and CAR are
cointegrated. Depending on these results, we may infer that the
appropriate model for NPL is the one represented in equation (3) and
determines that our estimations are reliable, i.e., not spurious.
Equation 4 reflects that unemployment rate, return on equity, inefficiency,
capital adequacy rate have positive long-term effect on NPL ratio. In
figures, when unemployment rate (UR), return on equity (ROE), capital
adequacy (CAR) increased by 1 point then NPL rate increased 0.15, 0.011
and 0.146 by point respectively and when industrial production index (IPI),
Istanbul Stock Exchange100 Index (ISE), Inefficiency ratio of all banks
(INEF) increased by 1 point then NPL ratio decreased by 0.004, 0.109 and
0.063 point, respectively
In addition, equation 4 reveals that there is a significant positive relation
between NPL rate and the first, second and also fourth lag of error term. In
figures, when , and increased by 1 point, the DRPPI increased by 1.118,
0.522 and 0.272 point respectively.
5 Conclusion
This study analyzes the relationship between the NPLs ratio and several
macroeconomic and bank specific factors in Turkey by using ordinary least
square estimation approach with integration analysis and the time series
from January 2007 to April 2013.
Empirical results show that that debt ratio, loan to asset ratio, confidence
index-real sector, consumer price index, EURO/ Turkish lira rate, USD/
Turkish lira rate, money supply change, interest rate, GDP growth, the
Euro Zones GDP growth and volatility of the Standard & Poors 500 stock
market index does not have significant effect to explain NPL ratio on
multivariate perspective.
On the other hand, industrial production index (IPI), Istanbul Stock
Exchange 100 Index (ISE), Inefficiency ratio of all banks (INEF) negatively,
Unemployment rate (UR), return on equity (ROE), capital adequacy ratio
(CAR) positively affect NPL ratio.
Additionally the positive and negative effects are such a long-term, not
spurious. Our findings have several implications in terms of policy and
regulation. It can help identify the causes of NPL ratio and thus lead
2 Newey and West procedure may not appropriate in small samples. Since
we have 75 observations, our samples may be regarded as reasonable
large.
3 Two lags have been used in ADF unit root tests.